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Summary Financial Accounting
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Summary of Financial Accounting for BA1 Business Economics at the VUB.
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Financial accounting: Chapter 1: Conceptual Framework and Financial StatementsWhat is accounting?
- The language of business
- An information system that identifies, measures, records summarizes, and reports economic
information (from business activities) to decision makers in the form of financial statements.
These decisions might again have an impact on the business activities.
This diagram illustrates the flow of accounting
information and helps illustrate accounting’s role in
business. The accounting process begins and ends
with business activities and people making
decisions.
Accounting is an information system of things that
are happening, they are summarized into financial
stated and reports by economic information
(decision makers)
Decision makers (interesting in accounting, investments…)
- Accounting information is useful to anyone who makes decisions that influence business
activities and have economic results.
o Investors/ shareholders (= owners of the shares, company) want to know if a
company is a good investment with adequate returns
o Creditors (banks/suppliers *) want to know if they should extend credit, how much to
extend, and for how long.
o Clients want to know if they can rely on proper after sales service.
o (future) Employees want to know if the company is able to provide job security and a
good salary. More jobs opportunities
o Government agencies à tax collections, statistics… à retrieving information
o The Public à might be interested in the sale service, warranty…
* = They are selling us the goods that we need. How do they avoid risks? They ask them to pay cash or shorten
credit period or don’t sell, they have a collateral (like a bank when someone lends money he needs to give you a
collateral, like when you buy a house, and you can’t pay your dept than the bank will take your house in
possession, sell it so they have their money back) Why are banks interested in accounting investments? Because
they know they will get their money back. Credit period = 30 days
Financial vs Management Accounting:
- The major distinction between financial and management accounting is the users of the
information
o Financial accounting: focuses on the specific needs of decisions makers EXTERNAL to
the organization, such as stockholders, suppliers, banks and government agencies à
it is summarizing past events and make them external.
o Management accounting: serves INTERNAL users, such as top executives,
management and administrators within organizations (a.o. budgets, forecasts,
projections…) à is kept internal (for the concurrent)
The Various Forms of Business Organization:
- Accounting is used in every type of business. A business generally takes one of the following
forms:
o Proprietorship:
§ 1 owner called the proprietor. Legally the business is the proprietor
1
, § He is personally liable* for all his debts
o Partnership:
§ 2 of more owners as co-owners. Each owner is called partner
§ In general, not tax paying entities, each partner takes a proportionate share
of the entity’s taxable income and pays tax according to that partner’s
individual or corporate rate
§ Mostly small or medium sized but can be really large (real estate an oil and
gas exploitation companies operate often as partnerships)
§ Personally liable.
o !Corporation!:
§ Business owned by shareholders
§ All types of entities may be shareholders in a corporation
§ Not personally liable
*= Legal frame between the private asset and company assets, the personal assets will not be affected
(accounting purpose)
o Bankruptcy: not being able to pay your depts
o Example:
§ Bakery 1: sold partnership can lose personal belongings
§ Bakery 2: corporation cannot lose personal belongings only assets of the
corporation
Where is the creditor riskier to sell too? à Bakery 2, if he goes bankrupt you
only play a hand on asset of the corporation not on the personal assets and
then he can lose more.
Accounting standards:
- Are necessary because without them, users of financial statements would have to learn the
basis for accounting for each company, making comparisons to the other companies’ financial
statements difficult.
- Until recently, one of the major challenges of conducting global business has been the fact
that different countries have adopted different accounting standards for business
transactions.
- The major developed countries (US, Japan, Germany…) have their own version of accounting
standards:
o GAAP: Generally Accepted Accounting Principles
§ the most common frameworks used in the US with the overall objective to
provide financial information about the reporting entity that is useful to
existing and potential investors, lenders, and other creditors in making
decisions about providing resources to the entity.
§ As investors seek to compare financial results across from different countries,
they have to restate and convert accounting data from one to the next in
order to make them comparable
à potential solution: IASB (International Accounting Standards Board) and
the IFRS (International Financial Reporting Standards
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, o IFRS:
§ Formed with the objective of developing a single set of high-quality,
understandable, and enforceable accounting standards to help participants in
the world’s capital markets and other users make economic decisions. In the
long run, the global use of IFRS should reduce the cost of doing business
globally.
§ More than 140 out of 166 worldwide jurisdictions
§ It is not used for every type of company
§ National government need to decide if they allow and whether or not use
IFRS for all kind of companies and no longer via the national standard
§ These are the countries were IFRS is required for domestic public companies
- Effects of the IAS Regulation (EU)
Individual financial Group/ Consolidated
statements financial statements
Listed companies Member state option IFRS mandatory
Not-listed companies Member state option Member state option
o Individual FS: individual account of the individual company
o Group/consolidated FS:
§ All the legal entities over the world
§ All the FS added up for all the individual companies
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, § All the Individual FS together
o The national government can choose which one they use national or IFRS but for the
bigger picture they have to use IFRS
o Individual FS use Financial GAAP
o Belgium: corporations’ business (11 million habitants) =400 000 corporation and 400 000 sold
partnerships: only 200-250 of those companies are listed on the stock exchange. So only 200-250 have
to apply IFRS
The Conceptual Framework:
- The conceptual framework’s focus is a general purpose of financial statements which are
prepared and presented (at least) annually and are directed toward the common information
needs of a wide range of financial statement users.
- What makes accounting information useful?
o Relevance:
§ The information must be capable of making a difference to the decision
maker
• Predictive value: users make their own perditions of future outcomes
• Confirmatory value: assessing previous evolutions
o Faithful representation:
§ Financial statements represent economic phenomena in words and numbers.
So, the underlying phenomena should be complete, neutral and free form
error
o Comparability:
§ Users compare financial statements of an entity over a period of time in
order to identify trends in its financial performance and position. So, it is
important that the information remains comparable over time.
o Verifiability
o Timeliness: information must be available early enough to help them make decisions
o Understandability:
Financial Statements:
- the primary questions about an organization’s success that decisions makers want to know
are:
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